For numerous US citizens residing in New Zealand, the application of US capital gains tax to the sale of New Zealand assets raises common concerns.
A driving factor behind this concern is the misconception that New Zealand does not impose a capital gains tax, which is not entirely accurate.
Both New Zealand's Bright Line Tax and the United States' Capital Gains Tax share certain similarities in their tax policies. Nevertheless, the scope and reach of the US tax policy are notably broader. These policies pertain to the taxation of profits arising from the sale of property, and it's crucial to comprehend their interplay.
New Zealand's Bright Line Tax, instituted in 2015, was designed to curb property market speculation. It mandates individuals who sell residential properties within a decade of purchase to pay taxes on the gains realized from the sale. The tax rate for the Bright Line Tax generally aligns with an individual's marginal tax rate in New Zealand. However, the application of the tax varies based on the property acquisition date:
• Properties acquired on or after 27 March 2021 and sold within 5 years for qualifying new builds or within 10 years for all other properties
• Properties acquired between 29 March 2018 and 26 March 2021 and sold within 5 years
• Properties acquired between 1 October 2015 and 28 March 2018 and sold within 2 years
Conversely, the United States' Capital Gains Tax encompasses a wider spectrum, encompassing gains from the sale of diverse assets such as stocks, bonds, vehicles, and other assets, not solely limited to real estate.
Given that US citizenship is linked to tax residency, it implies that US citizens selling assets in New Zealand remain subject to US capital gains tax.
For individuals liable to both the Bright Line Tax and the US Capital Gains Tax, the prospect of double taxation can be alleviated. Fortunately, the bilateral double taxation agreement between New Zealand and the USA facilitates the claiming of credits when a substantially equivalent tax has been paid in either country. In cases of real estate transactions, the nation where the property is geographically situated holds the primary taxation authority.
The foreign tax credit permits US taxpayers to assert a credit for taxes paid in New Zealand, up to the amount of US tax obligation on the same income. As an example, if an individual paid $10,000 in Bright Line Tax in New Zealand and their US Capital Gains Tax liability for the same property sale amounted to $12,000, they could seek a credit for the $10,000 paid in New Zealand, effectively reducing their US tax liability to $2,000.
Familiarizing oneself with tax regulations in both New Zealand and the US before engaging in property transactions is pivotal for optimizing tax efficiency. Seeking guidance from proficient tax advisors well-versed in the tax laws of both countries can ensure adherence to both New Zealand and US tax regulations.